The correct answer is: B. the dividends paid by the company grow at a constant rate of growth.
The constant growth model of equity valuation is a method of estimating the value of a stock by using the dividend growth rate and the cost of equity. The model assumes that the dividends paid by the company grow at a constant rate, and that the cost of equity is constant. The model can be used to estimate the value of a stock for a given dividend growth rate and cost of equity.
The constant growth model is a simple and easy-to-use model, but it has some limitations. One limitation is that it assumes that the dividends paid by the company grow at a constant rate. This assumption is not always realistic, as dividends can fluctuate over time. Another limitation is that the model assumes that the cost of equity is constant. This assumption is also not always realistic, as the cost of equity can change over time.
Despite its limitations, the constant growth model is a useful tool for estimating the value of a stock. The model can be used to compare the value of different stocks, and to track the value of a stock over time.
Here is a brief explanation of each option:
- A. the dividends paid by the company remain constant. This option is not correct because the constant growth model assumes that the dividends paid by the company grow at a constant rate.
- B. the dividends paid by the company grow at a constant rate of growth. This option is correct because the constant growth model assumes that the dividends paid by the company grow at a constant rate.
- C. the cost of equity may be less than or equal to the growth rate. This option is not correct because the constant growth model assumes that the cost of equity is constant.
- D. the growth rate is less than the cost of equity. This option is not correct because the constant growth model assumes that the cost of equity is constant.